Annuities are transferable, but almost every way of moving one to a new owner triggers income tax on the gain that has built up inside the contract. Whether a transfer is possible at all, and whether it costs you anything, depends first on what kind of annuity you hold. A qualified annuity sits inside a retirement account like an IRA or 403(b) and follows retirement-plan rules; a non-qualified annuity was bought with after-tax money and is governed by the annuity tax rules in Section 72 of the Internal Revenue Code. The workable tax-free paths are narrow: a Section 1035 exchange into another annuity you still own, a transfer to a spouse, or a transfer to a former spouse tied to a divorce. Nearly everything else is a taxable event.
Qualified vs. Non-Qualified Changes What You Can Do
A qualified annuity was funded with pre-tax dollars inside a tax-advantaged plan, so it moves the way any retirement account moves: trustee-to-trustee transfer or a 60-day rollover into another qualified account.1Internal Revenue Service. IRC 403(b) Tax-Sheltered Annuity Plans You cannot assign ownership to another individual. Try to hand it to anyone other than a spouse and the IRS treats the full contract value as a distribution, taxable as ordinary income, with a 10% penalty on top if you’re under 59½.2Internal Revenue Service. Topic No. 557 Additional Tax on Early Distributions from Traditional and Roth IRAs
A non-qualified annuity is legally assignable. The contract itself allows you to change owners. But legal and tax-free are different questions, and outside a handful of exceptions, changing the owner forces you to recognize the accumulated gain right away.
One boundary applies to both types. Once an annuity has been annuitized, meaning you’ve turned it from a savings contract into a stream of fixed payments, transfer is generally off the table. The income stream is locked to the annuitant, and the ability to change owners disappears.
Section 1035 Exchange: Swapping Contracts Without Tax
If your goal is a better annuity rather than moving the money to another person, Section 1035 of the tax code lets you exchange one annuity contract for another (or for a qualified long-term care contract) with no gain or loss recognized.3Office of the Law Revision Counsel. 26 USC 1035 – Certain Exchanges of Insurance Policies People use this to reach lower fees, better crediting rates, or riders their current contract lacks.
The rules are strict. The owner on the new contract must be the same person as on the old one. The annuitant must also stay the same. And the money has to move directly between the two insurance companies. Touch the funds personally at any point and the entire deferred gain becomes taxable.
Some traps come with the process. Cash or other property received in the exchange (sometimes called boot) is taxable as ordinary income the moment it comes out. Canceling a contract loan during the exchange can also create a taxable event.4Internal Revenue Service. Instructions for Forms 1099-R and 5498 The new contract typically resets its own surrender-charge schedule, so even with no tax hit, penalty-free access to your money can restart. A properly executed exchange is reported on Form 1099-R with distribution code 6, and no tax is due.
Partial exchanges are allowed, but a 180-day holding period applies to both contracts. Take a withdrawal from either one within 180 days and the IRS may recharacterize the whole thing as a taxable distribution. Annuity payments scheduled over a lifetime or over ten years or more don’t count against that limit.5Internal Revenue Service. Revenue Procedure 2011-38
Giving or Selling a Non-Qualified Annuity to Another Person
When you transfer a non-qualified annuity to someone else, whether as a gift or a sale, the tax code treats you as if you cashed it in. You owe ordinary income tax on the difference between the contract’s cash surrender value and the premiums you paid.6Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts – Section: (e)(4)(C) If you paid $60,000 in premiums and the contract is now worth $100,000, you recognize $40,000 of ordinary income the moment you sign it over. The new owner takes a cost basis equal to the cash surrender value at transfer, so the same gain isn’t taxed twice.
The main exception is transfers to a spouse, or to a former spouse in connection with a divorce, covered below.7Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts – Section: (e)(4)(C)(ii)
The paperwork is simple: a change-of-ownership form with the insurance company, sometimes requiring the annuitant’s consent. The carrier then issues a Form 1099-R showing the taxable gain. Watch for contractual surrender charges if you’re still inside the surrender-charge window.
Transferring an Annuity to a Trust
Trust ownership is where annuity transfers most often go wrong. Under Section 72, if a “non-natural person” (basically any entity that isn’t a human being, including most trusts) holds an annuity, the contract loses its tax-deferred status. Earnings inside the annuity are taxed as ordinary income every year instead of accumulating tax-deferred.8Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts – Section: (u)
The double hit is easy to miss. Moving a non-qualified annuity into an irrevocable non-grantor trust is still a change of ownership, so the accumulated gain is taxable at the moment of transfer. Going forward, annual earnings inside the trust are taxed each year rather than deferred. Between the two, the core reason to own an annuity is gone.
Some exceptions exist. A grantor trust, where you remain the effective owner for tax purposes, is generally treated as being held by a natural person, so deferral can survive. The statute also carves out annuities acquired by a decedent’s estate, annuities held inside qualified retirement plans or IRAs, and immediate annuities that begin paying within a year of purchase.9Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts – Section: (u)(3) If you’re weighing naming a trust as owner or beneficiary, the trust’s structure controls whether the transfer is tolerable or ruinous.
Transfers in Divorce Are the Real Tax-Free Path
Divorce is the one situation where you can move an annuity to another person entirely tax-free, and it works for both qualified and non-qualified contracts. Section 1041 says no gain or loss is recognized on a transfer to a spouse, or to a former spouse if the transfer is incident to the divorce.10Office of the Law Revision Counsel. 26 USC 1041 – Transfers of Property Between Spouses or Incident to Divorce The receiving spouse takes over the original cost basis, and the deferred gain stays deferred until they eventually withdraw.
A transfer counts as incident to the divorce if it happens within one year after the marriage ends, or if it’s related to the end of the marriage even when completed later. Under Treasury regulations, transfers made within six years of the divorce generally qualify under the second prong when they’re tied to the divorce agreement. Miss that window and the transfer reverts to the normal rule, where the gain is immediately taxable to the transferring spouse. Section 1041’s tax-free treatment also doesn’t apply if the receiving spouse is a nonresident alien.
For qualified annuities inside employer retirement plans, the mechanism matters. The plan will only pay a former spouse under a Qualified Domestic Relations Order, a court order directing the plan administrator to pay a portion of benefits to an alternate payee.11Internal Revenue Service. Retirement Topics – QDRO: Qualified Domestic Relations Order Without a QDRO, the plan follows its own terms regardless of what the divorce decree says.12U.S. Department of Labor. Qualified Domestic Relations Orders Under ERISA – A Practical Guide to Dividing Retirement Benefits IRA-based annuities don’t use QDROs; the custodian processes the split based on the divorce decree, moving the awarded portion into an IRA in the former spouse’s name. Non-qualified annuities don’t need a QDRO either, but a court order or divorce decree documenting the transfer is still necessary to lock in the Section 1041 treatment.
What Happens at Death
Transfers at death aren’t really transfers you choose. The contract passes to the named beneficiary outside probate, and how fast that beneficiary must take the money depends on who they are and what kind of annuity it is.
A surviving spouse has the widest options. For a non-qualified annuity, Section 72 lets the surviving spouse be treated as the new holder, continuing the contract and its tax deferral indefinitely.13Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts – Section: (s)(3) For a qualified annuity, the surviving spouse can roll the inherited account into their own IRA and treat it as their own.14Internal Revenue Service. Publication 575 – Pension and Annuity Income
Non-spouse beneficiaries face deadlines. For a non-qualified annuity, if the owner died before annuity payments started, the whole interest must come out within five years, unless the beneficiary elects payments over their own life expectancy and begins them within one year of death.15Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts – Section: (s) For a qualified annuity, the SECURE Act generally requires the account to be emptied by December 31 of the tenth year after the owner’s death, with annual minimum distributions inside that window if the owner had already reached the required beginning date. Certain beneficiaries — minor children of the owner, disabled or chronically ill individuals, and anyone not more than ten years younger than the deceased — can still stretch distributions over their own life expectancy.16Internal Revenue Service. Retirement Topics – Beneficiary
Two features of inherited annuities catch people off guard. Unlike most inherited property, annuities do not get a stepped-up basis. The deferred gain that accumulated during the original owner’s life is fully taxable as ordinary income when the beneficiary draws it out; only the original after-tax premiums come back tax-free. On the other side, beneficiaries are exempt from the 10% early-withdrawal penalty regardless of their age.17Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions